EI: An inequitable system that distorts the labour market

Amid all of the predictable controversy and excessive rhetoric surrounding the recently announced reforms to Canada’s employment insurance regime, there are a number of background facts that are germane to the policy debate.

• The incidence of seasonal employment has declined greatly since the 1970s due to technological change and a decrease in the share of aggregate output that is accounted for by industries with seasonal production patterns. Frequent users of EI, defined as those who have filed three or more claims in the past five years, represent only a small portion of the Canadian labour force – much ado about 2.7 per cent.

• Compared to the employment insurance regimes of other advanced industrialized nations, overall Canada’s program is neither unduly generous nor fiscally costly. Its salient and unique feature, however, is its generous treatment of part-year seasonal workers. Whereas many nations have seasonal workers, no other country has expressly designed its provisions to accommodate part-year workers on a recurring and permanent basis to the same extent as Canada. Although cutbacks were implemented in 1994, the particular eligibility parameters prevailing in certain regions allowing for short qualifying periods coupled with long benefit-entitlement periods, subject to annual renewal without limit, have not changed much since the early 1970s.

• Most of the frequent users are not financially well-off, receiving an annual income from all sources of perhaps $22,000.

• Extensive quantitative research based on representative samples of EI claimants and the entire labour force – as opposed to anecdotal evidence – indicates that frequent claimants, as well as the firms that employ them, alter their working patterns, hiring plans and layoff decisions in response to the parameters and rules of the EI system. Far too little attention has been paid to the fact that certain employers “game the system” and benefit greatly from having a contingent labour force that they can recall and temporarily lay off on short notice.

• There is incontrovertible evidence that the program breeds dependency among certain workers, a phenomenon known as the “EI trap.” It has also been proven that over the long run, EI shifts the composition of employment away from full-year jobs toward part-year jobs. While it is thought that the program discourages regional migration of workers, it is difficult to demonstrate that empirically.

• The vast majority of economists and public-policy analysts who have researched and monitored the system for the past three decades concur that, as structured, it unduly favours the interests of seasonal workers at the expense of infrequent claimants who experience permanent layoffs. The culmination of the findings of dozens of scientific articles and government reports, drawing on eclectic perspectives, is summarized in a report, to which this writer was a contributor, published by the Mowat Centre called Making It Work. The primary conclusions are that the regime is both inequitable and inefficient.

One potential – and likely intended – impact of the proposed changes is to signal to younger, more geographically mobile workers who are contemplating careers in seasonal work that their future opportunities are diminished, and that it would be advisable to take steps leading to full-year employment.

There are at least two alternative reforms that economists tend to favour. One possibility is the creation of a separate regime that would be designed especially for seasonal workers. Qualifying workers would be those with the highest adjustment costs (such as older, less mobile ones) who would receive an annual benefit of perhaps $8,000 for the purpose of maintaining their incomes. It would be paid irrespective of how much someone worked either on- or off-season.

A second possibility would be to implement an experience rating that would apply to both the firm (a mechanism that has never been in effect) and the worker. The latter scheme was implemented in 1996 in the form of the so-called intensity rule, but it was repealed in 2000 before it had much of an impact.

Either arrangement would likely result in fewer behavioural distortions and fewer seasonal workers collecting EI, but those remaining workers would likely have longer working seasons.